Responding To SoundExchange... By Their Numbers

from the going-through-the-details dept

This is a guest post from Fred Wilhelms, a lawyer whose concerns about SoundExchange we recently wrote about. Due to the length of the post, we've put some of it after the jump, so you'll need to click through to read the whole thing -- but, trust us, it's worth it.

Back before New Years, Techdirt's Mike Masnick picked up on my comment to regarding the list of artists SoundExchange said it couldn't find. I wrote that the list was not on the website. I was wrong about that, and Mike got suckered into repeating it. I went blissfully without the Internet for a couple weeks (yes, it is possible) and missed the whole thing. I just got it wrong. The list is there. I just couldn't find it.

My apologies, in order, to SoundExchange, Mike, and his readers. The list itself is a very interesting document on several levels, and I will be dealing with that later. This particular note has a specific purpose relating to Mike's piece.

SoundExchange folks like Director Dick Huey and staffer Laura Williams have been gushing all over about SoundExchange's new open communications policy. I have been trying to engage them in actual conversation, rather than simply criticizing their serial press releases. Their campaign seems to be faltering, however, as they've resorted to commenting on my supposed factual errors to third parties like Techdirt rather than deal with me directly. I don't mind. It's the tactic they've used with outside critics like me for years. It's arrogant, but what can we expect from an organization where the Board of Directors is hand-picked by the RIAA?

So, let me take this opportunity to deal with the "Top Ten Reasons Laura Williams Tells Techdirt Why I Am So, So Wrong About SoundExchange (But Won't Tell Me Directly)."

1. About the "missing" list of unpaid artists, I said it wasn't on the website. They said:
"Not sure how FW missed this. It's at It's been there all along, old website and new, and this version is easier to use than ever."
As noted before, I missed it.

There used to be a link directly from the homepage to the list, and a rolling counter of artists removed from the list. Those are gone. I used the search function on the site for "unregistered artists" (the term SoundExchange used to use to describe the entries on the list) and came up with nothing. I'm not sure how "easier" the list is to use, given that the alphabetizing scheme used by SoundExchange is even more idiosyncratic than the old one, but I will deal with the contents of the list, and what it means, separately.

All that aside, SoundExchange is right about this. I just missed the list.

2. About what happens to forfeited money, I said SoundExchange gets to keep the money. They said:
"This is a common misperception about SX. While our congressional mandate allows us to liquidate funds after 3 years, the board has repeatedly declined to do so, in hopes of locating more artists to pay properly. EVEN IF THEY DID RELEASE FUNDS, those funds go directly to the artists and rights holders who are currently registered, in a windfall royalty - SX is a non-profit and does not keep that money."
There's a whole bunch of misdirection and spin going on in those 70 words.

There's no "congressional mandate." The forfeiture is permitted by Federal regulation adopted by the Copyright Office, specifically, 37 CFR 261.8. A regulation is not a "congressional mandate," although I admit that mandate stuff makes it sound like it is something SoundExchange has to do, rather than something that SoundExchange asked the Copyright Office to do for them, which is what really happened. SoundExchange wants everyone to think they are forced by Congress into taking money from artists they can't find, even if that really isn't so.

Perhaps SoundExchange wants everyone to think it is a matter of Federal law because they don't want anyone looking at the regulation itself. You see, the regulation requires that all money that should be paid to an unidentified or unlocated recipient be placed in a segregated trust account. I've asked SoundExchange repeatedly over the years to advise me where the "segregated trust account" is held, but the inquiries are always met with silence. I've also asked them to tell me how much money is in that segregated trust account. They've ignored that too. I don't think the segregated trust account exists, for the simple reason that SoundExchange doesn't have the slightest idea which artists are entitled to what share of the undistributed money.

About "repeatedly declining" to forfeit more artist money, they say this as if refusing to take money from people who don't know about it is an act of moral courage. They also say this as if they actually never intended to do it again, when history proves otherwise. In January, 2007, immediately after the deadline for the first forfeiture, SoundExchange announced they were going ahead with a second one. Strangely, for an organization that claims to be so vitally concerned with serving artists, they never mentioned the new forfeiture program anywhere but on the website page that linked to the list of unregistered artists. In other words, you had to already know they had your money in order for you to find out they were going to take it. There was not one press release announcing the forfeiture, and not even a notice about it anywhere on the website, or anywhere else for that matter. In blunt point of fact, SoundExchange "declined" to go through with the second forfeiture only because there was public outrage that they would do it again and try to keep it a secret. SoundExchange clearly wants everyone to pretend that they never really meant to try a second forfeiture. The problem is, they did.

I said SoundExchange gets to keep money it forfeits from unfound artists. SoundExchange disputes that and claims that "those funds go directly to the artists and rights holders who are currently registered," which is utter bull. As that regulation so clearly states, SoundExchange doesn't pay the money "directly" to anyone. They get to use the forfeited funds to defray their own expenses, which, when you come down to it, means they get to use it for their own purposes. Technically, SoundExchange doesn't "keep the money," so the "correction" is correct in a very strict literal sense. However, reality shows that they don't keep it because they spend it, which doesn't match up with what they say here.

Now, of course, if they reduce their own expenses, that makes more money available for distribution to registered artists and copyright holders because they have to take less out of the current receipts. That's a good thing, but reality tells me that there are a couple problems. First of all, anyone who has ever worked for a non-profit that must keep a lid on expenses can tell you that "extra" money that can be used to defray expenses tends to get used up pretty fast. In the case of SoundExchange, I can clearly imagine that the forfeited money financed a good part of the musicFIRST campaign for the terrestrial radio performance royalty. Secondly, take a look at what happens to whatever money does get through that "expense" process to be paid to registered recipients. As royalty money is split 50/50 between artists and copyright holders, and, by their own estimates, 70% of the copyright holder royalties goes to the four RIAA members who directly control six of the eighteen seats on the SoundExchange board (and who appointed the other twelve out of the goodness of their hearts), that means that 35 cents out of every forfeited artist royalty dollar goes to the four RIAA members. The one thing SoundExchange got right in its "correction" of my comment is the idea that this is a "windfall." I don't think they meant it the way it actually comes out, because the greatest windfall ends up in the lap of the RIAA labels, but they won't tell you that outright and if you ask them about it, like I have, they ignore you. Because they can.

If SoundExchange actually spent that forfeited money on improving their efforts to find the artists, like the language of the forfeiture regulation actually intends that they do, that would be fine. But they don't, and their "correction" of my comment is nothing but more smoke and mirrors to hide that.

Click the read more or comments link below to see the additional eight points Wilhelms raises in response to SoundExchange.

3. About SoundExchange's apparent problem in finding artists, they said:
"The problem isn't finding them, or contacting them. It's getting them to register. Many, many artists do not register after multiple personal and digital contacts. Just because they have a website doesn't mean they're payable."
No matter how many times they say it, it doesn't ring true, and history exposes the lie for what it is.

Since 2006, SoundExchange has been telling everyone how hard it is to get people to register after they've contacted them, and back then, they published a list of over 9,000 artists that supposedly proved the point. But then a funny thing happened, people outside SoundExchange, like me and dozens of others, started contacting people on the list; cold calling them and telling them about SoundExchange. And an even funnier thing happened; the list began to shrink. All this time, SoundExchange was telling everyone how hard a job they were doing in finding people, with clearly limited success, and, lo and behold, an unfunded, uncompensated, grassroots effort was able to do what SoundExchange had failed.

And a still funnier thing was that, in the hundreds of artists on the list that I contacted personally, only ONE had ever been contacted by SoundExchange before me. You would think that, if "many, many" artists were ignoring SoundExchange, I would have run into more than one, but I didn't.

Dick Huey says that the first order of business with the published list is to update it to show which artists have already been contacted and which haven't, but it seems to me that they will actually find more artists by spending the time (and that forfeited money) looking for them than telling everyone that they haven't responded, but then I'm not in the business of trying to excuse SoundExchange's shortcomings. There must be a good reason for updating the list like Huey wants, but I don't think it will find one more artist, which is the whole idea of the list, isn't it?

4. About SoundExchange's lobbying efforts (which actually don't come up as an issue in the Techdirt article) they said:
"Another misconception. We're a 501(c)6, and completely free to lobby on behalf of our members interests. Our advocacy efforts are funded only by members, as authorized in their signed agreements, and you don't have to be a member to collect domestic royalties."
The problem here, which Ms. Williams fails to mention, is that recording artists cannot be members of SoundExchange unless they also own the copyrights in their recordings, so use of money from those artists violates the IRS code she so confidently cites.

This is what the SoundExchange FAQ says about membership:
"SoundExchange members are those who own copyrights in sound recordings."
Now if SoundExchange is willing to state that not one cent of non-copyright-owning artist royalties went for lobbying, and willing to open the books to prove it, I will retract my questions about the legality of SoundExchange lobbying. Until then, my doubts remain, and the refusal of Ms.Williams, Mr. Huey and every other SoundExchange representative to address this issue only reinforces those doubts.

5. About the list I couldn't find, again. They said:
"The list is available on the website and was never unavailable. It's 3 clicks from the home page and the second search item under 'unpaid artists'."
Mea culpa. Again.

6. About the failure to update the unpaid list on the old website, they said:
"We do not update the list on the website as it was a one-time release of artists who stood to lose money in a 2006 pool release (which was later cancelled in favor of ongoing efforts to find artists). This is clearly stated on the list. Names come off the unpaid list all the time, but the website list was a static, one-time release."
This is just denying history. Between September, 2006 and July 2008, SoundExchange updated that list many times. In fact, the old home page had a rolling counter showing how many artists on the list had registered. It wasn't static. I have a rather large spreadsheet showing which names were deleted at various times that refutes the idea that the list was static.

It may just be a coincidence, but SoundExchange stopped updating the list entirely when it became obvious that people outside SoundExchange were finding almost all the artists who came off the list. The list was last updated in July, 2008, during the last stages of "Project Unfound Artist," a grassroots effort I was a part of that took over 300 names off the list in less than three months.

And just to be precise, SoundExchange went through with that 2006 forfeiture. It wasn't "cancelled in favor of ongoing efforts to find artists." That's simply a reprehensible lie. I have no idea why SoundExchange would deny the 2006 forfeiture took place, but as they don't have to explain, I don't expect them to.

7. About the absence of information about sampling on the website, they said:
This has also been on the website all along. Our new handy glossary function includes 'census vs. sample' or you can use our search function on our website and type in "sample"
Firstly, it has not been on the website "all along." This would be instantly verifiable if SoundExchange allowed the Internet "wayback machine" to access the site archives, but given the obvious interest in rewriting history, their reluctance is understandable.

Lacking that opportunity, you're going to have to bear with some real history. Beginning in 2007, I engaged in long, and eventually fruitless, correspondence with both John Simson and Neeta Ragoowansi regarding the lack of information on the website about SoundExchange's use of sampling. John Simson went so far as to justify this by claiming that SoundExchange had explained its reliance on sampling in filings with the CRB, and that artists could get the information there. After stalling for over a year, Simson told me that there would be information about sampling on the website "soon." That was in September, 2008. References to sampling didn't appear on the website until the recent revisions. It really is past time to stop these distortions about what was there "all along."

Secondly, I used the search function, but, silly me, I used the word "sampling" rather than "sample." The FAQ section SoundExchange quotes never appear in the results. All that comes up is a couple of SoundExchange's press releases, both of which include impressively large logos that say "GET PLAYED. GET PAID." We know that's not true, don't we?

8. More about sampling. They said:
"Also freely available on the website: As of November 15, 2009, the CRB regulations 74 Fed. Reg. 52418 (Oct. 13, 2009) require almost all webcasters provide year round census reporting (that is, a record of each track played, each time it is played, and total listeners). Sample reporting and aggregate tuning hour reporting are no longer permitted "
This is basically irrelevant to the issues at hand, but it is also grossly inaccurate. What SoundExchange fails to mention is that the regulation exempts what are known as "minimum fee broadcasters" from the census reporting requirement. They can report playlists for just two weeks out of every quarter. (This is sampling, even if they won't admit it) This exemption shouldn't bother very much the RIAA folks who control SoundExchange, because those "minimum fee broadcasters" aren't playing Beyonce or Shakira that record for their labels; they're playing the niche artists who are self-produced and distributed, or who may appear on the independent labels that Mr. Huey says he's looking out for on the SoundExchange Board. Those indie artists, and their labels, who GET PLAYED during the eleven weeks not reporting in the quarter, are not going to GET PAID. The exemption favors the big labels, which will get a bigger share of the royalty pie as a result. So, tell me again how that's not the poor subsidizing the rich?

If that was the biggest problem with SoundExchange's response, it would be bad enough, but they go on from there to say this
"Even before this took effect, sampling applied to an extremely small percentage of services - 95% of the royalties SoundExchange distributes are based on census, track-level data."
Attention should be paid to the choice of words used, specifically "distributes." Paying out 95% sounds pretty good, until you realize they're not talking about 95% of the money collected. The problem has never been with the money paid out. SoundExchange's problem is with, as it has always been, the money NOT paid out. I have it on good authority that when SoundExchange gets around to filing its IRS-990 return for 2008, it will reveal that it has accumulated over $180 MILLION in undistributed royalties. The 2007 return shows that number to be just over $101 million, so it is obviously not moving in the right direction. If the upward trend continued at the same pace, we actually might be looking at a quarter of a billion dollars in undistributed royalties as of today, but SoundExchange steadfastly refuses to talk about this at all, so, as far as they are concerned, we shouldn't be concerned about this money. It is just nobody's business but theirs.

So, rather than, "what percentage of distributed royalties are based on census data?" the question should be "What percentage of the royalties received are distributed AT ALL?" That's not a question we're likely to get an answer to, because SoundExchange would have to admit there isn't a good answer....

9. Still more on sampling. They said:
"From the website: Currently, certain Services are not required under the statutory license to provide census reporting (i.e. a listing of all sound recording performed during the entire reporting period). When a Service only reports a sample, Featured Artists and Copyright Owners may not be compensated for sound recordings transmitted in the weeks missed by the sample. SoundExchange continues to advocate for full census reporting and works with Services to provide full reporting whenever practicable."
I have to admit it. It's there. In nearly unreadable gray type, much smaller and less flashy than that GET PLAYED GET PAID graphic, and the small type is buried in Section 4 of the "Policies And Procedures" section of the site, but it's indubitably there, and has been for over two whole months. At least they're not claiming this was "always" there.

10. And one final word on sampling. They said:
"SX has always promoted and advocated for complete census data, unlike other PROs which rely exclusively on sample. It's the fairest way to distribute royalties, and we stand by it."
I'm not sure how this comment qualifies as a correction of anything I said. I happen to agree with the statement, and I commend their position. I have always been an advocate for census reporting, even though I realize the burden it places on many smaller webcasters.

The problem this statement represents is one that has been part of SoundExchange for a long, long time. They want credit for saying the right thing, and have a lousy record for doing the right thing. There's a difference between the two. I don't expect anyone from SoundExchange to come here and respond to these comments. Twice in the recent past, Ms. Williams has stated her intent to engage in a discussion, and then she's disappeared from the forum, so expecting her to respond here is a long shot. It's pretty clear SoundExchange intends to play hit-and-run public relations rather than actually engage in the "discussion" that Mr. Huey and Ms. Williams claim they want. That's just more of the same weird reasoning at work; if they say they want to discuss things openly and honestly, that's just as good as actually discussing things openly and honestly.

The tactic has served them well in the past, and there's no good reason, other than honesty, to expect them to give it up now.
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Filed Under: collection societies, collections, musicians, payments
Companies: riaa, soundexchange

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  1. icon
    Fred Wilhelms (profile), 11 Jan 2010 @ 9:55pm

    The existence of a relative handful of artists who refuse to sign up shouldn't serve as an excuse for SoundExchange not to look for the rest, like they promised to do when they volunteered for the job. There are going to be artists who will not sign up. There are at least three group names on the list that include people who are (or were, the last time I checked) probably fugitives from justice. I seriously doubt the Singing Dogs will sign up. Nobody is going to find everyone on that list. That's no reason why SoundExchange shouldn't try their best to find as many as they can. They took on this job of their own free will, they weren't sentenced to do it.

    The record of the last three and a half years shows that SoundExchange has done a lousy job of looking for and finding artists, and outsiders have not only done it better, they've done it cheaper, and they've proven that SoundExchange's blaming the artists for not signing up is a specious defense.

    The forfeiture procedure is based on a Federal regulation modeled after the provision allowing PBS to recover mechanical royalties set aside for "orphan works;" compositions where the current legal rights holder cannot be identified or located. That provision is designed to free up a couple thousand dollars a year for a non-profit that depends largely on public support for financing. It requires PBS to show due diligence in looking for the payees and requires that the money for the licenses be set aside in a segregated trust account for three years before it can be recouped.

    SoundExchange refuses to divulge where the segregated trust accounts on the unpaid artists royalties are, or even if the accounts exist. As far as "due diligence" is concerned, all anyone has heard so far is vague references to the "many, many" artists who have been contacted but who have not registered. Furthermore, the money involved at SoundExchange is not, like the PBS "orphan works" account, a couple thousand a year which represents a tiny fraction of PBS's budget. At SoundExchange, the unpaid artist royalties constitute as much as 40% of the total artist revenue in a given year. That is the size of the "reserve" SoundExchange has established to pay claims for unregistered artists, so we're not talking about the PBS pocket change, but a large portion of the organization's revenue. In 2006, SoundExchange had aggregated about $75 million in unpaid artist royalties. In 2007 (as shown by the IRS return linked to by Angus), that number increased to $101 million (Line 54). SoundExchange's 2008 return has not yet been filed (or at least it has not shown up on Guidestar), but internal sources have confirmed that the undistributed artist royalty number jumped to $181 million by the end of 2008. Given the trend, there's good reason to believe the total is now over $250 million.

    That's a quarter billion good reasons why SoundExchange won't publish an up-to-date list. SoundExchange is trying to convince Congress that it is the only good choice to collect and distribute performance royalties from terrestrial radio stations under the Performing Rights Act. As big a snow job as they've been able to do on Congress over the years, it might just test their credibility if they have to make that pitch while admitting they already owe artists a quarter of a billion from their existing job.

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